Chapter 19, Problem 2CTQ

To determine

The changes in revenue with a change in the price of cigarettes

Introduction:

Price Elasticity of Demand – If for a one unit change in the price, the demand increases more than proportionately the demand is said to be elastic. If however, the responsive change in demand is less than proportionate the demand is said to be inelastic while it is said to be unit elasticity if the percentage change in demand is equal to the percentage change in price. If elasticity is ‘e’ then it is defined as:

$e=\frac{\%\Delta Q}{\%\Delta P}$

If e > 1, the demand is elastic

e < 1, the demand is inelastic

e = 1, the demand is unit elastic

e →∞, the demand is perfectly elastic

e = 0, the demand is perfectly inelastic

Total Revenue- It is the total earnings of the producer/seller by selling Q units of output each at a price of P. Functionally, it is written as:

$TR=QXP$